Bernanke Can't Please Anyone

Gentle Ben just can't win.

After being excoriated by lawmakers two weeks ago for being too slow to lower interest rates in response to the U.S. housing downturn, Federal Reserve Chairman Ben Bernanke will likely face questions at a Wednesday hearing on Capitol Hill about whether his aggressive cuts in interest rates has given rise to the threat of inflation.

On Tuesday, the Labor Department reported its producer price index rose 1% in January, more than twice the 0.4% increase expected. On a year-over-year basis, the index jumped 7.4% -- its biggest advance in more than two decades.

The gauge of wholesale prices was particularly worrisome to investors after the government reported last week that its consumer price index also jumped in January, combining with other recent economic data to show that inflation is clearly on the rise.

Meanwhile, the average fixed rate for a 30-year home loan has increased over the last month, according to mortgage giant Freddie Mac(FRE Quote - Cramer on FRE - Stock Picks), even while Bernanke has slashed interest rates in 2008 faster than any Fed chairman since 1982. The central bank's federal funds rate target has been lowered by 225 basis points since September with a stunning 125 basis points of that move coming in January alone.

"The Fed's in a bind now," says Paul Kasriel, chief economist with Northern Trust Co. of Chicago. "I was surprised by the PPI, but inflation is a lagging indicator. It's always on the rise at a time when the economy is transitioning from strong growth to a downturn, so I expect it to moderate soon and so does the Fed."

That's a view that has been expressed repeatedly by Fed officials lately. Bernanke has stressed that while inflation remains a concern for the Fed, the risk of an economic slowdown and a meltdown in the world's financial markets remains the central bank's chief concern.

The threat of inflation is widely downplayed now on Wall Street and in government, but the price of gold has soared throughout the Fed's recent easing campaign, a sign that the market expects inflation to pick up. Meanwhile, the value of the dollar has plunged in the last year -- and just hit a record low vs. the euro on Tuesday. Energy prices continue to climb higher, and the Conference Board reported Tuesday that its consumer confidence index dropped to 75 this month, from 87.9 last month. The last time the index was at that level was in early 2003 at the start of the war in Iraq, when the economy was growing but the unemployment rate was hovering just below 6%.

In light of the slowing economy, Bernanke has faced harsh criticism for not easing monetary policy fast enough to address the problem.

"When you see something coming, don't put it off," Sen. Jim Bunning (R., Ky.) told Bernanke at a hearing in mid-February. "Take action immediately. This housing market has been coming to us for a year, year and a half, and we didn't react properly to it."

One lawmaker that has taken a different tack and is certain to press his case again Wednesday when the Fed chairman testifies before the House Financial Services Committee is presidential candidate Ron Paul (R., Tex.). He made monetary reform a central part of his campaign and garnered considerable attention and fundraising success on the Internet as a result.

"You wouldn't believe the response I get from young people on college campuses when I talk to them about the problems with our monetary system," said Paul in a recent interview with TheStreet.com. "They understand the issue, and they know their future is in jeopardy due to the excesses in our financial system and our federal government."

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